Fintech Sandbox: Facilitating Innovation in NBFCs
Banking Law | NBFC | Non Banking Finance | Finance Banking | Finance Banking Laws | Banking Governance |
Introduction
Non-banking financial companies (NBFCs) are an important segment
of the Indian financial system, providing credit and other services to the
underserved and unbanked segments of the population. However, NBFCs face
several challenges such as regulatory compliance, operational efficiency,
customer acquisition, risk management, and innovation. To overcome these
challenges, NBFCs need to leverage the power of emerging technologies and
collaborate with fintech companies that offer innovative solutions and platforms.
One of the ways to foster such collaboration and innovation is
through a fintech sandbox, which is a controlled environment where fintech
companies can test their products and services with real customers and data,
under the supervision and guidance of regulators and industry experts. A
fintech sandbox can provide several benefits for NBFCs, such as:
1.
Access to new and alternative data sources, such
as social media, e-commerce, mobile, and biometric data, that can help NBFCs
improve their credit scoring models, customer segmentation, and underwriting
processes.
2.
Access to new and advanced technologies, such as
artificial intelligence, machine learning, big data analytics, blockchain,
cloud computing, and robotic process automation, that can help NBFCs enhance
their operational efficiency, fraud detection, cyber security, and regulatory
compliance.
3.
Access to new and diverse customer segments,
such as millennials, gig workers, small and medium enterprises, and rural
customers, that can help NBFCs expand their market reach, offer personalized
products and services, and increase customer loyalty and retention.
4.
Access to new and innovative business models,
such as peer-to-peer lending, robo-advisory, digital payments, and insurance,
that can help NBFCs diversify their revenue streams, reduce their cost of
funds, and increase their profitability and competitiveness.
Examples of Fintech Sandbox Initiatives
Several countries and jurisdictions have launched or announced
fintech sandbox initiatives, such as the UK, Singapore, Hong Kong, Australia,
Malaysia, Thailand, Bahrain, Abu Dhabi, and Dubai. Some of the examples of
fintech sandbox initiatives that are relevant for NBFCs are:
1.
The Reserve Bank of India (RBI) has launched a regulatory
sandbox for fintech companies in August 2019, with the theme of ‘Retail
Payments’.[1]
The sandbox allows fintech companies to test their products and services for a
period of six months, with a maximum extension of another six months. The
sandbox covers areas such as mobile payments, digital KYC, QR code-based
payments, offline payment solutions, and blockchain-based payments. The RBI has
also announced the second cohort of the sandbox, with the theme of ‘Cross
Border Payments’, in November 2020.
2.
The Monetary Authority of Singapore (MAS) has
launched a [fintech sandbox] in June 2016, which allows fintech companies to
test their products and services for a period of up to 18 months, with a
possible extension of another 12 months. The sandbox covers areas such as
lending, insurance, wealth management, payments, and digital banking. The MAS
has also launched a [fintech sandbox express] in August 2019, which allows
fintech companies to test their products and services for a period of up to
nine months, without the need for prior approval from the MAS. The sandbox
express covers areas such as insurance broking, remittance, and digital
advisory services.
3.
The Financial Conduct Authority (FCA) of the UK
has launched a [fintech sandbox] in May 2016, which allows fintech companies to
test their products and services for a period of up to six months, with a
possible extension of another six months. The sandbox covers areas such as
lending, insurance, wealth management, payments, and digital banking. The FCA
has also launched a [global financial innovation network] in January 2019,
which is a network of regulators and organizations that aims to facilitate cross-border
testing of fintech products and services and share best practices and
experiences.
Challenges Of Fintech Sandbox:
1. Legal uncertainty: The sandbox may
create ambiguity or inconsistency in the interpretation and application of
existing laws and regulations, or create loopholes or gaps that could be
exploited by unscrupulous actors.
Best Practices and Recommendations for Implementing
a Fintech Sandbox:
1.
Define clear objectives and scope: The sandbox
should have a clear purpose and scope, aligned with the regulator’s mandate and
the market’s needs. The sandbox should also specify the types of products,
services, or business models that are eligible for testing, and the expected
outcomes and benefits for the participants and the consumers.[2]
2.
Set transparent and consistent eligibility
criteria: The sandbox should have objective and consistent criteria for
selecting the participants, based on factors such as the innovativeness,
readiness, and scalability of the proposed solution, the potential risks and
benefits for the consumers and the financial system, and the fit and properness
of the applicant.[3]
3.
Determine appropriate duration and extension:
The sandbox should have a predefined duration for the testing period, which
should be sufficient for the participants to collect and analyse the data and
results, and for the regulator to monitor and evaluate the performance and
impact of the solution. The sandbox should also have a clear exit strategy and
criteria for granting or denying an extension of the testing period, if needed.[4]
4.
Establish reporting and evaluation requirements:
The sandbox should have regular and timely reporting and feedback mechanisms,
both for the participants and the regulator, to track the progress and
performance of the testing, identify and mitigate any issues or risks, and
assess the outcomes and learnings of the testing. The sandbox should also have
clear evaluation metrics and indicators, such as customer satisfaction, market
penetration, cost reduction, risk reduction, or regulatory compliance.[5]
5.
Provide appropriate regulatory support and
guidance: The sandbox should provide adequate regulatory support and guidance
to the participants, such as granting regulatory waivers or exemptions,
providing dedicated contact points or mentors, facilitating cross-border
collaboration or coordination, or offering technical assistance or advice. The
sandbox should also ensure that the participants comply with the relevant laws
and regulations, and protect the interests and rights of the consumers.[6]
Conclusion
A fintech sandbox can be a powerful tool for facilitating
innovation and collaboration in the NBFC sector, by providing a safe and
conducive environment for testing and experimenting with new technologies,
products, and services. A fintech sandbox can also help NBFCs address their
pain points, such as regulatory compliance, operational efficiency, customer
acquisition, risk management, and innovation. By partnering with fintech
companies and regulators, NBFCs can leverage the fintech sandbox to enhance their
value proposition, customer experience, and competitive edge.
[1] RBI, FinTech: The Force of
Creative Disruption, www.rbi.org.in (2020),
https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=19899.
[2]Baker
McKenzie, A Guide
to Regulatory Fintech Sandboxes Internationally,
https://www.bakermckenzie.com/-/media/files/insight/publications/2020/05/a_guide_to_regulatory_fintech_sandboxes_internationally_8734.pdf?la=en
(last visited Jul 15, 2020).
[3] Id.
[4] Id.
[5] Id.
[6] Id.